UK productivity: challenging every business to improve

UK productivity: challenging

every business to improve

Tera Allas

McKinsey Global Institute

OECD Global Forum on Productivity

14th October 2016

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company 2 |

Contents

▪ While the government has a role to play, business action

is required to address the UK’s productivity shortfall

▪ Two thirds of UK employees work in businesses whose

productivity is lower than expected for their size and sub-sector

▪ The ‘How good is your business really’ on-line tool is part of

the proposed solution

▪ The potential prize from a scaled-up UK ‘productivity

movement’ is substantial


The UK suffers from long-standing productivity gap which is getting wider

SOURCE: OECD; McKinsey analysis

30

20

70

60

50

40

10

20

04

20

08

20

12

20

10

20

14

20

06

20

00

19

96

19

72

19

74

19

70

19

98

19

92

19

94

19

88

19

90

20

02

19

84

19

86

19

78

19

82

19

76

19

80

X% UK vs. US gap

Germany UK France US

-38%

-25%

-18%

-24%

Labour productivity, 1970-2014

GDP per hour worked, $ (2010 PPP)


National level drivers do not fully explain the UK’s productivity gap

SOURCE: World Economic Forum Global Competitiveness Report 2015-16; OECD; McKinsey analysis

4.7 5.2 4.4 4.9 5.3 4.8 5.0 5.1 5.4 4.6

65

35

30

25

75

70

60

55

50

45

40

20

10

5.9 6.0

5

5.8

15

5.6 0

5.5 5.7 4.5 4.2 4.0 4.3 4.1

80

Korea

Luxembourg

Portugal

Latvia

Slovenia

Switzerland Sweden

Norway

New Zealand

Mexico

Estonia

Iceland

United Kingdom Spain

Poland

Netherlands United States

Japan

Israel

Ireland

Belgium

Czech Republic

Australia

Turkey

Germany

Finland Italy

Hungary

Denmark

Canada

Greece

France

Austria

Chile

Captures factors such as institutions,

macroeconomic stability, human capital,

infrastructure, regulation and policy environment Competitiveness index score, 2015-16

Labor productivity, 2014

GDP per hour worked, $ (2010 PPP)

McKinsey & Company 5 | SOURCE: ONS; OECD; EU KLEMS; McKinsey Global Institute analysis

The productivity gap to Germany is not explained by sector mix

0.6 0.91.7

2.2

2.9F

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1 Excludes real estate, public administration, arts and entertainment, and community services due to lack of comparability; based on 2009 hours

Market sector1 labour productivity gap between UK and Germany, 2015

Estimated contribution to GVA per hour worked, £ (2010 constant, market exchange rates)


Poor management practices are a known cause of UK’s lower productivity

UK

(5.7%)

US

(1.8%)

Germany

(2.3%)

Global

(9.7%)

SOURCE: World Management Survey 2014 database; McKinsey analysis

1 2 3 4 5

5 4 3 2 1

4 2 5 3 1

5 1 4 2 3

Percent of firms according to management score

Scale 1–5

Management scores, 2004-2014

Scale 1–5

2.83 World average

China

Brazil -9.6%

2.66

Japan

Sweden

Argentina

3.00 Australia

2.88

2.97

2.95

3.17

Italy

Poland

2.75 Spain

2.69

UK

2.68

3.00

Canada

France

3.17

3.29

3.18

US

3.14

Germany


The Productivity Leadership Group, led by Sir Charlie Mayfield, was set up

to explore what businesses could do practically to raise productivity

Sir Charlie Mayfield

Chairman, John Lewis

Partnership

Carolyn Fairbairn

Director General, CBI

David Abraham

Chief Executive,

Channel 4

Sir Roger Carr

Chairman, BAE Systems

Ian Davis

Chairman, Rolls-Royce

Professor Juergen Maier

Chief Executive, Siemens

UK

Sir Andrew Witty

Chief Executive,

GlaxoSmithKline

Jeremy Anderson

Chairman, KPMG Global

Financial Services

Sir Richard Lambert

Former Director-General,

CBI and Chancellor,

University of Warwick

Sir Mike Rake

Chairman, BT

Dame Fiona Kendrick

Chairman and CEO,

Nestlé UK and Ireland

Nigel Whitehead

Group Managing Director,

Programmes and Support,

BAE Systems

Phil Smith

Chief Executive UK and

Ireland, Cisco International

Lady Barbara Judge

CBE, Chair, Institute of

Directors

Tera Allas

Visiting Fellow, McKinsey

Global Institute


Contents










UK productivity varies more within than between sub-sectors

SOURCE: ORBIS (2013 data)

100 150 50 0 0 150 100 50 100 0 -50 50 150 200

Bottom quartile Top quartile Median

Professional services

Wholesale

Construction

Leasing

Retail of goods

Hospitality

Industrial manufacturing

Utilities and telcos

Business admin

CPG Repair

Petro- chemicals

Machinery

Metals

Chemicals

Electronics

Construction materials

Dyes

Pesticides

Plastics

Gases

Inorg. basic chemicals

Rubber

Fertilisers

Paints

Org. basic chemicals

Sector Industry Sub-sector

CHEMICALS EXAMPLE

Distribution of firm productivity within segments of industrial manufacturing, 2013

GVA per employee (€’000), excluding micro-businesses of <10 employees

McKinsey & Company 10 | SOURCE: ORBIS (2013 data)

5

15

12

10

8

14

6

13

11

9

7

4

3

2

1

0

The productivity distribution is wider in the UK than Germany

Expected value

Productivity1, difference from expected value as a proportion of peer group median

+100% 0 +200% +50% +150% -50% -100% -150% -200%

1 Productivity measured by Estimated GVA (EBIT + employee costs)/Number of employees. Best proxy possible with available data.

2 Estimated GVA (EBIT + employee costs) is regressed on a range of variables to control for sub-sector and number of employees using a Weighted

Least Squares method (with employee numbers as the weighting)

Two thirds of UK employees

work for companies whose

productivity is below expected

1

UK employs 11% more of its

workforce in companies whose

productivity is below expectations

2

GE UK

Distribution of employees by their employer’s productivity1 relative to the expected productivity2

for a firm of their size and sub-sector

Percent


Significant under-performance is found among all sizes of firms

SOURCE: ORBIS (2013 data)

SME1

Productivity difference from expected value as a proportion of peer group median

1 SME = 10-499 employees; Large = 500-4999 employees; Very large = >5000 employees

Large

Very

large

5

20

0

15

10

0

6

8

4

2

8

4

2

6

0

+100% 0 +200% +50% +150% -50% -100% -150% -200%

Expected value

Distribution of UK employees by their employer’s productivity relative to the expected productivity for a firm of their size in their sub-sector

Percent


Contents









McKinsey & Company 13 | SOURCE: McKinsey analysis; literature review; expert interviews

We have developed an on-line app to diagnose 5 areas of performance

and to provide practical tips and advice on how to improve

Commercial

Excellence

▪ Management

behaviours

▪ Vision and

values

▪ Ambition

▪ Target setting

▪ Investment

▪ Innovation

▪ Performance mgmt.

▪ Talent development

▪ Motivation

Leadership

Talent

Management

Operational

Efficiency Planning for

the Future

▪ Continuous

improvement

▪ Cost management

▪ Procurement

▪ Maximising sales

▪ Exports and

internationalization

▪ Online presence

Firm-level levers for improving productivity


The tool comprises short surveys for each of the 5 categories, with

downloadable advice guides associated with each of the ~15 sub-categories

SOURCE: Team analysis

Users have a personalised “dashboard” page,

which gives access to surveys and best practice

across the 5 categories

1

The tool provides information on

best practice, practical

implementation tips, and

access to other useful resources

3

Users complete mini-surveys and their

answers get benchmarked against best

practice and their peers

2


The dashboard page provides an overview of performance in completed

sections of the tool

SOURCE: Team analysis

The tool is modular, so different

elements can be completed at

different times

When filled in, the bars in each

section indicate performance

against benchmarks


The tool is part of a broader ecosystem of support on productivity

What does

good look

like?

Where

am I

now?

How do

I get

better?


Contents










The productivity opportunity is spread across all sectors of the economy

SOURCE: ORBIS (2013 data); OECD (2013)

1 Each company was given a percentile ranking within a group of comparable companies (same sub-sector and size category). We then calculated the

gains to GVA if each company in the bottom 75% increased their performance to match the productivity of the company ten percentiles above them

2

3

3

4

3

3

Construction

Business admin

Prof. services

IT services

CPG

Indust. Man.

Utilities & telcos

Wholesale

Retail of goods

Total

Extractive

131

High-street

14

11

12

10

6

12

6

5

5

5

Other

Hospitality

Healthcare

Leasing

Education

Media

26

V Large Large SME Potential GVA gains per year1

£bn (2013 prices)

If the lowest

75% of UK firms

matched the

performance of

a firm 10

percentiles

above it, UK

GVA would be

£130 billion

higher


The government and business community need to work together to build

up momentum behind the ‘productivity movement’

Business

▪ Engage customers,

suppliers and

networks

▪ Provide leadership,

expertise and

resource

▪ Build into self-

funding initiative

Government

▪ Raise awareness

▪ Use business ‘touch

points’ to engage

▪ Co-ordinate with

other programmes

▪ Seed-fund

permanent initiative

Collaboration

▪ Authority

▪ Accountability

▪ Evaluation


The tool is available on the ‘How good is your business really’ website

You can test the tool at:

tool.howgoodisyourbusiness

really.co.uk

Demo username:

[email protected]

Demo password:

Cafe2016

UK Productivity:

A business perspective

Tera Allas

McKinsey Global Institute

[email protected]

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

Economy & Finance

UK productivity: challenging every business to improve